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Primary Risks Of Buying A Luxury Condo During Pre-Construction

What To Know

In the glamorous world of luxury real estate, buying a pre-construction condo is an exciting thing to do. And while a GOOD portion of our biz comes from pre-construction condos, this type of purchase has its own set of risks. With more than 150 years of combined experience at Williams Luxury Homes and over $1 billion in luxury real estate sales, we’ve gained invaluable insights into the possible challenges one might encounter during the process. Today, we will walk you through these potential risks, with real-life examples.

Hard Contract Deposits

Making a substantial hard contract deposit is an integral part of the pre-construction buying process. These deposits, often amounting to 10-20% of the purchase price, are non-refundable and tied to the project until escrow closes. Here are some points to remember:

  • Deposits can't be reclaimed easily
  • Potential changes in buyer's circumstances are irrelevant
  • Market fluctuations can impact the property's value negatively

After this initial commitment, you're in for the long haul. Any change in your personal or financial circumstances won't affect your obligation to close escrow, even if market conditions worsen.

Also Read: Why Buying Straight From A Developer Is Not In Your Best Interest

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Luxury Condo Views Can Change Very Fast

The 2008 Real Estate Crash: A Case Study

No discussion on pre-construction buying risks can be complete without mentioning the 2008 real estate crash. It dramatically showcased the potential risks involved in such investments, even with major developers involved. Some key takeaways from this period include:

  • Significant delays in project completion
  • Substantial depreciation in property value
  • Tough choices for buyers on whether to close or walk away

One of our agents (who used to work in Vegas) experienced this turmoil firsthand with $30 million in escrow for luxury condos on the The Strip. By the time these properties were ready to close escrow, their market value had depreciated by about 30%. Do you close and lose 10% equity? Or just walk away and lose your deposit? In our agents case, only $2 million of the $30 closed escrow.

Construction Risks: Not Just About Delays

Construction-related risks go beyond potential delays and can include quality issues and even structural faults. Key things to remember here are:

  • Major faults can lead to project cancellations
  • Errors may slip past inspections
  • Repercussions for buyers are usually limited to refunds

Even with the most extensive oversight from OSHA, significant structural faults can get missed. In such cases, buyers typically receive their deposit back with minimal interest, far less than what they could have earned through other investments.

Also Read: The Importance Of Working With A True Luxury Condo Specialist

Optima McDowell Mountain Village.

New Luxury Condo Projects Are Being Built Around Greater Phoenix

Changing Landscape: Views & Market Conditions

The dynamic nature of urban landscapes and real estate markets adds another layer of risk to pre-construction investments. This uncertainty extends to:

  • Changing views due to new construction
  • Market speculations affecting project feasibility
  • Time and energy lost on projects that don't materialize

Market changes can both delay projects and reduce property values, while new constructions can block those perfect views you were promised. On occasion, developers may even flip land or modify projects based on market speculations, wasting buyers' time and resources.

The Importance Of Representation

Navigating the pre-construction buying process can be a complex task. It is crucial to remember that sales teams at developer sites primarily represent the developer's interests. It might be beneficial to:

  • Engage a trusted real estate agent
  • Understand the risks of dual agency
  • Evaluate alternative projects before committing

At Williams Luxury Homes, we maintain transparency and keep it real. Remember, it's not about discouraging you from buying a pre-construction condo, but about ensuring you make informed decisions. After all, luxury is as much about peace of mind as it is about grandeur.

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